The Initial Impact of COVID-19 on Labor Market Outcomes Across Groups and the Potential for Permanent Scarring
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ESSAY 2020-16 | JULY 2020 The Initial Impact of COVID-19 on Labor Market Outcomes Across Groups and the Potential for Permanent Scarring Betsey Stevenson i The Hamilton Project • Brookings MISSION STATEMENT The Hamilton Project seeks to advance America’s promise of opportunity, prosperity, and growth. The Project’s economic strategy reflects a judgment that long-term prosperity is best achieved by fostering economic growth and broad participation in that growth, by enhancing individual economic security, and by embracing a role for effective government in making needed public investments. We believe that today’s increasingly competitive global economy requires public policy ideas commensurate with the challenges of the 21st century. Our strategy calls for combining increased public investments in key growth-enhancing areas, a secure social safety net, and fiscal discipline. In that framework, the Project puts forward innovative proposals from leading economic thinkers — based on credible evidence and experience, not ideology or doctrine — to introduce new and effective policy options into the national debate. The Project is named after Alexander Hamilton, the nation’s first treasury secretary, who laid the foundation for the modern American economy. Consistent with the guiding principles of the Project, Hamilton stood for sound fiscal policy, believed that broad-based opportunity for advancement would drive American economic growth, and recognized that “prudent aids and encouragements on the part of government” are necessary to enhance and guide market forces. ii The Hamilton Project • Brookings The Initial Impact of COVID-19 on Labor Market Outcomes Across Groups and the Potential for Permanent Scarring Betsey Stevenson University of Michigan JULY 2020 This policy essay is an essay from the author(s). As emphasized in The Hamilton Project’s original strategy paper, the Project was designed in part to provide a forum for leading thinkers across the nation to put forward innovative and potentially important economic policy ideas that share the Project’s broad goals of promoting economic growth, broad-based participation in growth, and economic security. The author(s) are invited to express their own ideas in policy papers, whether or not the Project’s staff or advisory council agrees with the specific proposals. This policy paper is offered in that spirit. The author(s) did not receive financial support from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article. at this realization do they shed workers. Across the economy Introduction the process of businesses reducing hiring or closing up shop altogether, as well as fewer businesses being created, can The arrival of the novel coronavirus in the United States often last for years, with job losses accumulating over time. brought with it a public health crisis that meant that The labor market becomes like a game of musical chairs in previously advantageous ways of organizing work and home which more chairs are removed each month and those sitting life carried new costs. As COVID-19 (the disease caused by in chairs increasingly refuse to stand up and potentially free a the novel coronavirus; hereafter COVID) began to spread chair for someone else. As a result, long-term unemployment in early March, schools closed and businesses sent workers grows over time, and labor force participation falls slowly as home as all but essential services temporarily shuttered. More unemployed workers give up and leave the labor force and than 31 million applications for unemployment insurance those considering whether to enter or reenter the labor market were filed during March and April, a period during which become discouraged about the prospect of finding work. the economy was essentially put on pause and many jobs were temporarily suspended.1 The official unemployment During the last recession, job growth slowed in 2007, before rate peaked at 14.7 percent, but the logistical challenges with consistent job loss began in February 2008, a month when measuring a surge in people who were suddenly laid off means the economy lost 79,000 jobs. Monthly job loss accelerated that, more realistically, the unemployment rate might have over the next year, hitting a peak monthly loss of 800,000 been over 20 percent at its peak.2 The need to stay home in jobs in March 2009. Job losses continued through mid-2010, order to stay safe caused many people who were not currently by which point 8 million jobs had been lost. Even after job in the labor force, but who would have started looking for a growth slowly resumed, long-term unemployment and job in March and April, to put job-finding plans on pause. declines in labor force participation continued for years. The data show that new entrants and reentrants to the labor The prime-age labor force participation rate only began to force plummeted both in absolute numbers and as a share of consistently improve at the end of 2015 (Breitwieser, Nunn, the unemployed. Labor force participation fell to 60.2 percent and Shambaugh 2018). in April 2020, a low last seen in the early 1970s. In contrast, over the two months of March and April 2020, The sharp declines in spending and work were guided by both the overall labor force participation rate and the state stay-at-home orders, although research has shown that prime-age participation rate fell far below the low rate that the driving force was voluntary as many people stayed away the previous recession took 5 years to hit. And yet, nearly from crowds and businesses began to implement work-from- half of the decline had been reversed by June as labor force home policies prior to state policies being enacted.3 Those participation rose in both May and June. Similarly, the who could do so worked from the safety of their homes, while unemployment rate hit a high not seen since the Great others were temporarily laid off waiting to find out when Depression just two months into the recession, and has since and if they would be called back to work. Many of the self- reversed about 40 percent of its climb. employed found that they were no longer able to provide their services and were left, along with other business owners, to However, the traditional benchmarks measured in April reexamine their business models to assess how likely it is that had captured neither the damage to the labor market nor they will be able to resume pre-pandemic operations in the the permanent changes in workers’ attachment to the labor medium term. force. Both unemployment and the decline in labor force participation reflected many truly temporary layoffs since Parents faced an added challenge as those who had previously some workers who were sent home would be needed back relied on schools and child-care centers were forced to in their jobs as soon as the economy could reopen. But take on new roles as educators and round-the-clock child- even as millions have returned to work, both the employers care providers as schools and child-care centers closed. who did and those who did not originally do temporary The pandemic also interrupted alternative forms of child layoffs continue to grapple with how to adjust to a changing care, including relying on older family members such as economic and public health situation. Permanent job loss and grandparents. Many working parents were left scrambling to worker detachment from the labor force is occurring slowly, find a way to simultaneously do their job and care for their with each day bringing new layoffs that no longer represent a children. business pausing, but rather are increasingly likely to reflect a business reorganizing or closing. The job loss and unemployment witnessed early on was unlike a normal recession. In a normal recession, it takes time Demand in the economy, and therefore labor demand, was for employers to realize that demand for their product has lowered both directly and indirectly from the pandemic. The declined or that their business model is not robust enough to direct effect is a suppression—people are staying home or be sustainable in a weak economy. Only once employers arrive avoiding certain types of spending to avoid being infected 2 The Hamilton Project • Brookings by the virus (or because state stay-at-home policies and other jobs have accounted for more than half of the growth in restrictions have constrained them). But labor demand is also nonfarm payroll jobs held by women in the 21st century. being affected by overall concerns about current and future Jobs in education and health services have grown nearly income and the economy. Only once the labor market is no continuously over time including through past recessions. longer being suppressed by both stay-at-home measures and Job loss began in March, but primarily occurred in April, at people’s actions to directly avoid viral infection will we learn which point employment had declined by 11 percent. Women the unemployment and labor force participation exit rates made up 82 percent of the lost jobs in that industry. from which we must slowly recover. While these two sectors help explain why women got hit A closer look at how job loss unfolded and recovered across hardest as the pandemic began, they also explain why the different groups provides some insight into what the future gender gap in unemployment and labor force participation may hold for the labor market. Equally, it is important to rates narrowed substantially in June as many of these jobs realize that no one is able to assess the long-term scarring recovered.